The popularity of exchange-traded funds (ETFs) is climbing as more and more investors seek out investment opportunities. With a track record of exponential growth, ETFs are attracting more products, strategies, as well as active managers than ever before. Morningstar’s Bryan Armour explains that the rising popularity is due to lower expense ratios, providing investors distinct advantages over mutual funds.
ETFs are proving to be successful investment vehicles due to their lower expenses, trading advantages, and tax efficiency. Armour states that “cost is one of the best predictors of future success,” and compared to mutual funds, ETFs are significantly cheaper. Additionally, the ability to trade ETFs throughout the day provides a distinct advantage over mutual funds. Whereas mutual fund orders are executed once a day, ETFs are priced and traded like stocks. The tax consequences for investing in ETFs are also more attractive, as they are much more tax-efficient than mutual funds.
The appeal and efficiency of ETF investing have enticed even professional analysts, such as Todd Rosenbluth, who has transitioned from analyzing stocks and mutual funds to focusing specifically on ETFs. However, there are limitations to consider, as generally, 401(k) plans do not offer ETFs in their investment lineup. Furthermore, ETF investors looking to invest in cryptocurrencies typically opt for direct trading, as 401(k) plans do not offer ETF options for cryptocurrencies.